A spotlight has fallen on mortgage product fees as some lenders charge up to £2,000 in added costs.
Many lenders have been cutting fees as the market becomes more competitive, with Scottish Widows, Saffron and Landbay recently announcing big reductions in the hope of attracting more customers.
Advocates of product fees claim they allow lenders to offer lower interest rates – but questions remain about whether the charges are necessary.
Bob Riach, director at Scunthorpe-based Riach Financial Advisers, said: “Where is the product fee going? Is it just profit for the lender?
“Years ago, the average product fee was £100, but some are now charging up to £2,000. They are being accepted as the norm. Some lenders without a product fee have a slightly higher interest rate.
“If it is a smaller mortgage, we will often say it is probably not worth looking at a product fee of £1,000 when you only owe £50,000, so we look for a rate that does not have a product fee.”
Many lenders give borrowers the option of adding the fee on to the cost of the loan instead of paying up-front, and Mr Riach said 99 per cent of his clients choose to do so.
John Earnshaw, an independent financial adviser based in Poulton-le-Fylde, Lancashire, said the usefulness of products fees may be a matter of geography.
“In the North, where the mortgages are a bit smaller, it is often not cost-effective because you are not going to recoup it over the course of a small loan,” he explained.
“For a mortgage of £60,000 to £70,000, it might not be worth paying that fee, but in the south it might be worth paying because you are going to recoup that fee.”
Other brokers are more positive about the fees.
Nick Green, broker at Alternative Estates and Financial Services in Coventry, said: “I think product fees are fine as these give the clients the opportunity to buy a lower rate to obtain lower payments for the first few initial years and the only way for the lender to price it is to charge for it.
“So long as the clients are aware of the extra cost and the potential saving versus the fees then I have no issues recommending rates with product fees.”
John Phillips, group operations director at Just Mortgages and Spicerhaart in Colchester, denied they cause confusion for the borrower.
He added: “The most important thing is ensuring that the product is suitable for the customer and their situation.
“Any good broker will of course provide the customer with a quote and will be transparent in terms of any associated fees attached to the mortgage, such as arrangement or mortgage account fees.
“However, the customer is often more interested in the overall cost of the mortgage as well as the monthly mortgage payments.”
A spokesperson for the Council of Mortgage Lenders (CML) commented: "Lenders have to fulfill certain regulatory requirements concerning the fees they charge, but within these limits they can devise their own pricing structure. The important issue for the consumer is that details of all fees and rates are disclosed upfront.
"The CML and Which? worked together in 2015 in developing a new tariff of mortgage charges, which uses standard terminology, formatting and descriptions for a range of fees, including product fees.
"The structure is broken down into sections that show the customer when they will have to pay the fee; the name of the fee; a description of what the fee is for; and the value of the fee. This structure has been tested in consumer research, which demonstrated it provided improved clarity."
simon.allin@ft.com
